Agency Shows Need for Action in Sydney’s Core

As a testament to ‘walking your talk’, Savills has moved into its new premises at Governor Phillip Tower as tenant options in Sydney’s CBD Core precinct continue contracting at a rapid rate.

Over 2016 the options available for tenants to take up whole floor lettings in prime grade buildings (both from existing vacancy and upcoming stock) in the Sydney CBD fell by a nation-leading 93 floors. More critical is the CBD Core however, where options available for tenants to occupy either immediately or in the coming six months has fallen to just 24 from 67 according to Savills latest Full Floor Availability report.

According to Simon Fenn, Savills Australia’s NSW Managing Director, the group was mindful of the need to do a deal early in the CBD Core in order to attain quality space before a material tightening in the leasing cycle.”

“Sydney has been a world-leader with effective rental growth of circa 50 percent evident during 2016, and the cycle is likely to continue with new major projects not coming online until the end of 2019/20. In this environment tenants, us in this case, are forced to plan well in advance,” Mr Fenn said.

“While the landlocked nature of the CBD continues to hinder net supply, we estimate there is approximately $7.9bn worth of new construction and infrastructure earmarked for the circa 1km radius between George Street, Phillip Street and Bridge Street, which continues to improve the area’s amenity and appeal.”

“In addition to the Light Rail and Circular Quay Ferry, Bus and Rail Interchange upgrade, upcoming developments such as 1 Alfred Street by Wanda, Quay Quarter by AMP, Circular Quay Tower by Lend Lease and Sandstone Precinct by Pontiac, are seeing a major renaissance for the CBD Core,” he said.

Mr Fenn said it was clear to Savills that “To provide staff and clients with the best amenity over the coming decade we wanted to retain a Core CBD presence, given the strengthening market we were fortunate to have secured the lease in early 2016.”

While the tightening CBD Core precinct is leading to rental pressure on tenants, it is also driving global investor interest in the precinct that is soon to be tested with a number of major asset sale campaigns underway.

Savills Head of Capital Strategy, Chris Freeman, said from an international perspective, Australia is a standout and the Sydney CBD Core is the hottest precinct within Australia at present.

“If you look simply at population growth forecasts over coming years for example, of the top 30 economies in the world by GDP only Saudi Arabia and Nigeria are expected to exceed Australia; with our growth expectation being more than double that of the US, UK and China - not to mention negative expectations for Japan,” Freeman said.

“In a low growth and low interest rate global environment, such fundamental drivers are highly attractive, but when coupled with amenity improvements and material supply constraints for the CBD Core, that are clearly apparent when looking over the past decade, it is understandable why we expect new benchmarks to be set over 2017,” he said.

Mr Freeman said between 2017 and 2020, before major new stock additions with additional height allowances can enter the market while additional withdrawals occur, we expect effective rents to rise by an additional 33%.

“This is growth potential that is the envy of the developed world, and we will soon see how the world prices such potential.”